WE LIVE in strange, even desperate times and yet the energy industry is prospering. Anecdotally, while it remains next to impossible to borrow sensibly from banks although they would deny this, the healthy energy sector has other ways of financing its ambitions, notably via private equity.
“From the private equity perspective this is quite an interesting time because any people looking for money for growth right now have quite a tough time with the banks,” says Trevor Burgess, MD of Lime Rock Partners.
“It’s very hard to get money from the banks, even if you have solid EBITDA; and for companies starting up new technologies and new businesses, they probably don’t stand a chance with bank money. So the next best solution is to come to P/E.
“What P/E offers when people are starting up new companies or are in growth mode is partnership. You know the money’s not cheap and you have to give up equity (a stake in the business).”
But Burgess insists that, at least in the case of Lime Rock, the partnership is genuine; help to review their value proposition, strategy, to find the right calibre of new people to strengthen their teams, to purse internationalisation and even find customers.
| Trevor burgess Q & A: |
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Age: 57 Education: Oxford: BA Mathematics (1st) 1973-76; D. Phil. Mathematics (applied geostatistics) 1976-79 Main roles in career and dates:
What has been the hardest decision you have made in business? To resign from Schlumberger after almost 20 years. One of the best decisions too. Schlumberger trained me well but was stifling at that stage in my career. Who has inspired you most in your career? Tom Bates – a mentor of mine throughout my career in Schlumberger, Baker and Lime Rock – a clear communicator, who genuinely cares about people, pays attention to the numbers, but is willing to take calculated risks. What do you regard as being your greatest success to date? Rebranding and repositioning of Expro prior to taking the company private. I believe this helped to create more value for the shareholders and a sense of unity and common purpose for employees. Where is your favourite holiday destination? All over the UK. I love to travel overseas but never get bored with the British countryside. I had really enjoyable breaks in 2011 on Skye, the Moray Firth, the Borders and in Sussex. What is your favourite gadget? A Zebra 0.5mm propelling pencil. Best product for taking notes, sketching, and solving killer Suduko puzzles in the Times. If you were not in the job you are in, what job would you like? I don’t think about it. Growing companies and creating jobs is fun. If you keep thinking about other jobs you won’t be happy in what you are doing. If you can’t be happy in your job then quit and do something else. |
“And at the end of that we’ll help them exit and hopefully fulfil their dreams on that.”
The bit that goes unsaid by Burgess is that Lime Rock too will hopefully fulfil its strategic money-making objectives behind investing in promising businesses in need of a financial leg-up.
However, there is often a blue-skies element to many small energy service companies and time and again it seems that they often have to sacrifice that to get the money they need to move ahead?
Burgess doesn’t deny this, arguing that those nursing blue-sky technology aspirations have to be realistic. But he claims his approach is tempered with pragmatism.
In his case, he is not a banker in a P/E wrapper. Burgess has a PhD in mathematics from Oxford and has a 30-year oil career embracing Shell, Baker Hughes, Schlumberger and Expro.
“We’re risking our own money. Every deal we do we invest alongside (the investee). I think that keeps us grounded and certainly helps us work in the trenches with those guys.
“What you’ll tend to find is that people who have been in oil and gas for a while are quite pragmatic and realistic about their expectations.
“Sometimes the most difficult investments are where you have an inventor who is effectively one man with an idea that he thinks is going to save the world, so to speak, and doesn’t realise all the challenges of getting new ideas into the oil-patch.
“I have a check list that I use when looking at new businesses. I always carry it with me and I always say first of all, is there a compelling value proposition in the idea?
“If you can’t understand how you’re going to make money from it very quickly, then there’s not a compelling value proposition. What I mean by that is that you’ve either got to be cutting costs by 30%, improving reserves by 10% or improving recoverable reserves by a significant amount to even get through the first stage.
“You have to look at the people you’re considering investing with. In the end it’s all about people. Technology doesn’t make money, its people who make money in business and so create wealth.”
But then the boss of the candidate company has to face up to whether Burgess will brook him as CEO or MD going forward. It might be best for that person to accept the fact that the best way forward is for someone else to take the helm.
“The question becomes, are you willing to report to someone above you to look after the commercial and business aspects of your venture? If you say no, it’s my baby, I can’t give it up, then it’s probably not a good investment for us.”
Burgess is clear that Lime Rock is not a Dragon’s Den; nor is he in the business of TV-style snap decisions.
“Let’s be clear. Dragon’s Den is entertainment; we’re in it as a serious business and I’ve not seen a deal, realistically, take less than three or four months to complete.”
Chemistry is important to Burgess as he walks through a candidate firm’s door for the first time. Does he see before him a management team or leader with a clear, strong plan for the future, understands the value proposition, has found the customer who is interested in testing the technology if he gets it there, and has a pragmatic approach to business?
“You can generally tell that within a day or two,” he says. “And sometimes within an hour or so based on the way they answer questions. But then you do have to go through a fairly long process of due diligence.”
Because of his heritage in an innately conservative industry, any risk that Burgess might take with a candidate firm and its technology proposition will be heavily qualified.
“You’ll see a lot of P/E, growth equity people talking about words like disruptive, ground-breaking, revolutionary. I never use language like that.
“If someone comes into us using that sort of vocabulary I tend to get worried because they don’t realise what they’re going to hit when they try commercialising an idea.
“People who buy products in the oil and gas business don’t want a revolution. They want to go home and sleep in their bed at night.
“To find the early adopter who is willing to test your technology is critical. If you can’t find one at the excitement stage . . . when you’re thinking about developing the idea . . . you’re not going to find one at the commercial stage.
“I have examples of investments that we’ve made where I won’t invest until we’ve helped that company find the customer who will commit to running it or help us to develop it. I think that’s the right stage. I don’t think its investor-ready until then.”
So how many companies with a technology wheeze go knocking at the Lime Rock door in Aberdeen?
“On average we’re going to see one or two new technologies a week. Most of them you can screen out in a couple of hours work.”
Burgess has no option, he has to be tough.
“The things you look for are: management team, value proposition, does the concept work and can it be integrated, is there a customer involved, are they taking a pragmatic approach.
“You can fix one or two of those things if they’re not there. But if you see three, you probably shouldn’t be doing it.”
“What a lot of people come with is great ideas for technology … really compelling, some. As I’m a bit of a technology geek myself, I love it. But technology is not enough. The value proposition and way to market have got to be there. And if something requires, for example, a complete change of business practise to implement, it’s going to be very hard.
“I’ll give you a good example.
“In the industry a few years ago there was a lot of talk about the mono-bore expandable well. Where is it today?
“It’s there in the background as a contingency in well casing. The first vision was brilliant, but it required such a change of today’s business practises … the way wells are drilled and completed, that it was too much. What has transpired is not the vision that Shell originally had.
“Yes, expandable sand-screens have a market and we see contingency liners, but I still haven’t seen a mono-bore well drilled from top to bottom. And that’s 10-15 years on since the concept was introduced.
“What I’m saying is that, the ideas that are going to be commercially successful in the time within which an investor or individual probably wants to go for, you have to see it reaching market and becoming commercially successful within five to six years. I always look to see; can you implement it with data processes, can it replace what we’re doing today and not upset the whole applecart.”
By contrast, Burgess said that Norwegian company Reelwell pushed all his buttons, though initially it wasn’t wholly apparent.
But then he stood back, focused properly and began to realise that its well technology was “brilliant”. There were pluses too in that the leadership was “compelling”, “dynamic”, and there were sponsor customers.
“The ingredients were there; we hit it off as a team, I could bring in expertise that as needed. We thought it made sense so we made the investment.”
One view of P/E, however, is that it may damage a good company; that said, the opposite view is expressed too.
There are several types of P/E and one needs to distinguish between the different sorts. For a start-up company there a can be angel investors … some people call them friends, family and fools; venture capitalists who take a lot of risk and look for big returns in getting things up and running; then there’s growth equity … the sort of thing that Lime Rock does.
“We’re really providing capital for companies that are going to grow and create jobs,” said Burgess. “Take Enermech (an Aberdeen company). They’re now employing almost 1,000 people from almost nothing.
“Then there’s Serimax … one we got out of in 2010; they employed about 800 people when we exited … phenomenal. I think growth equity is in the jobs creation business.
“When you look at what’s happened at Expro Group; they’re in a leveraged buy-out situation. There’s a lot of debt; and debts carried covenants and payments; and the investment that would have gone into perhaps new technology or new capex is there to pay.”
The company was bought off the stock market in April 2008 for £1.6billion by Candover.
“The point I want to get across is that what we do in terms of growth is a lot different from a leveraged buy-out.. We’ve seen the same thing in some of the 3i deals. That’s not what Lime Rock’s about.”
Burgess confirmed that there is confusion in the corporate community as to precisely what P/E is and does.
“Say P/E and people think it’s all one thing; but it’s like saying banker. But there are many different types of banker,” he added.
Looking at the market today; how healthy is it in the oil and gas context? Pretty good as far as Burgess is concerned. His reckoning is that exploration and appraisal expenditure worldwide grew about 20% in 2010 but that he would not be “shocked” if spending in 2012 turned out to be flat.
“But P/E doesn’t behave like a public company … quarter to quarter. We’re looking across a 5-10 years cycle and see things that way.
“I think we have a lot to be optimistic about,” said Burgess. “Oil and gas remain the word’s primary energy source, nuclear has taken a huge bash from Japan, wind is going to play its role, yet gas generates electricity 15% cheaper than onshore wind and 50% cheaper than offshore wind at the moment.
“But, if oil and gas are to remain the dominant source, and given the rates of decline for many wells, we need to drill many more just to keep up with demand.
“Those wells will need more servicing and technology per well. If you multiply more wells by more services per well, then I’m a huge believer in the service industry for the next 10-15 years.”
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